Couchbase, Inc. (NASDAQ:BASE) Q2 2024 Earnings Call Transcript

Couchbase, Inc. (NASDAQ:BASE) Q2 2024 Earnings Call Transcript September 6, 2023

Couchbase, Inc. beats earnings expectations. Reported EPS is $0.17, expectations were $-0.23.

Operator: Greetings, and welcome to the Couchbase Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you, Edward. You may begin.

Edward Parker: Good afternoon, and welcome to Couchbase’s second quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase’s Chair, President and CEO, Matt Cain; and CFO, Greg Henry. Today’s call will contain forward-looking statements which include statements concerning financial and business trends and strategies, market size, our expected future business and financial performance and financial condition and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views as of any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release and our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases, which are available on our Investor Relations website.

With that let me turn the call over to Matt.

Matt Cain: Thank you, Edward, and good afternoon, everyone. On today’s call, Greg and I will provide details on our second quarter results, as well as our third quarter and full year fiscal 2024 guidance. I’ll start off with a few highlights of our Q2 financial results. Couchbase delivered a strong quarter, once again, beating our guidance across all metrics. I am pleased with the team’s execution against our strategy to deliver top-line momentum while outperforming on profitability, all against a difficult economic environment. Total annual recurring revenue, or ARR, was $180.7 million, up 24% year-over-year, up 23% in constant currency and 5% sequentially. Revenue in Q2 was $43.1 million, up 8% year-over-year and 5% sequentially.

Our non-GAAP gross margin remains best-in-class at 87.2%. Non-GAAP operating loss was $9.2 million, and non-GAAP operating margin was 4 percentage points above the midpoint of our implied guidance range. This demonstrates our focus on increasing efficiency across our business and continued operating expense discipline. As we crossed the halfway point of the fiscal year, I’m especially proud of the progress we’re making on the four key priorities we laid out for fiscal 2024: focus on top-line growth; increase the mix of Capella; drive sales and marketing efficiency; and accelerate the pace of leverage in our model. While there is much more to do across all of these to reach our full potential, our momentum is building. We believe we are set up for a strong second half of the year and, more importantly, beyond.

We have many initiatives underway to continue our progress, but I want to touch specifically on the exciting opportunity we see with AI and how it will be a tailwind for all four of our key priorities. To begin, databases are the unsung heroes of AI, because without data, there is no AI. The fact is behind every application is a database. From day one, we’ve architected a cloud database platform that enables demanding applications to not only perform, but provide rich, personalized, differentiated experiences for end users. Combining operational and analytical capabilities, our multi-modal platform also seamlessly integrates advanced services, like indexing, eventing, full text search, and more, in a single solution for developers. Our platform and unique architecture are perfectly suited for the massive performance and scalability requirements that AI applications require.

We’re investing in additional AI capabilities that will further extend the value of Couchbase as a cloud database platform for modern AI applications. Generative AI is the next great catalyst for modern applications. Developers and customers are exploring ways to build AI powered apps that can run anywhere with our platform. To cement our long-term position as a destination for AI applications, our AI strategy has the following four pillars: first, drive developer productivity and adoption; second, optimize AI processing; third, enable AI powered apps anywhere, including at the Edge; and fourth, build and foster a vibrant AI ecosystem. With that backdrop, I’m excited that last week we announced a private preview of Capella iQ, which adds generative AI capabilities to our Capella offering to greatly enhance developer productivity.

Developer productivity has never been more important given the pressure to rapidly innovate and deliver increasingly more complex workflows. This new capability in Capella will allow developers to use natural language prompts to quickly and easily generate queries and code, sample datasets and unit tests. What used to take a developer hours to code, takes minutes with Capella iQ, moving from thought to code in just a few clicks. I encourage you to visit our website and watch the demo video of Capella iQ to see just how profound of an impact the feature will have for developers. Leveraging generative AI to build and test applications more quickly and more easily in Capella leads to higher developer productivity and quality, with the ultimate result being faster and more efficient time to market.

We expect this will drive increased Capella adoption and consumption. Our vision for Capella iQ is to be a co-pilot for developers that makes intelligent recommendations during the development process, and we will continue to build out and enhance this important new feature. On the go-to-market side, we continue to focus on improving efficiency by driving ongoing operational improvements and investing in our partner ecosystem. AI is undoubtedly gaining momentum across our partner ecosystem, which is why last week we also announced our Couchbase AI Accelerate Partner Program. This program is designed to make it easier for customers to build AI applications with Capella, and support integrations with the broader AI and data ecosystem. It reduces friction for customers who are building and deploying models for AI applications and includes technical, enablement and go-to-market opportunities for participating partners.

Additionally, we continue to deepen and expand our relationships with our strategic partners who are starting to see next-gen AI applications deployed on their clouds. At AWS, we’re developing ongoing ways to reach and serve our customers through an increasing number of go-to-market activities around joint asset creation, developer engagement and AWS summits around the world. And I’m happy to share that Couchbase is now a Google Cloud premier partner. The aforementioned recent announcements illustrate how exciting the AI opportunity tailwind is and how it drives further progress against our four key priorities for the year. While it is still early days, the potential for AI to drive significant transformation is enormous. That said, we continue to deliver additional important Capella innovations for customers at a rapid pace.

Last week, we also announced several other new updates to Capella that further enhance the developer experience, increase efficiency, and make it easier to operate the cloud database platform. Our differentiated technology remains at the heart of who we are, and we will continue to work hard every day to rapidly bring market-leading enhancements and capabilities to our offering. Now, turning to customer wins, I am pleased with the breadth of activity across industries and our product portfolio that we saw this quarter. Starting with Capella, our managed service continues to gain momentum. Once again, Capella represented the majority of our new logos and was an important contributor to our strong net retention rate. In Q2, we saw new Capella wins across many industries, including financial services, academia, manufacturing, telco, hi-tech and gaming.

We also continue to see existing customer migrations and expansions with Capella. During the quarter, leading global fintech company MoneyGram decided to expand its partnership with us and invest in Capella to offload database management and further improve TCO. Switching to enterprise, we were excited to add several impressive new logos during the quarter, including a large banking group in Europe. This customer had to migrate away from Oracle because its legacy relational database was not delivering the desired performance. This customer is using Couchbase for its derivatives clearing application and selected our platform for its superior performance and speed. I’m also pleased that we won an AI-powered application with Tondo Smart, a fast-growing technology company in Israel, that delivers a connected devices platform for smart cities.

Tondo selected Couchbase to power its cloud-based smart city management platform, including AI for city sensor operational excellence use cases. This customer needed a cloud database platform that could deliver high performance, scalability and mobile use cases. Only Couchbase could deliver on these needs with the most compelling price performance. We also saw significant enterprise expansions with long-term customers, including a large Australian multinational banking company, one of the US’s largest financial services companies and a major consumer electronics retailer. Additionally, Tesco, a British multinational grocery retailer and one of the world’s largest retailers, has signed a multi-year agreement. Trendyol is the leading multi-category e-commerce marketplace in Turkey and one of the top e-commerce platforms in the world.

Recently, Trendyol significantly expanded its partnership with Couchbase to help support many of its most important application, including its online shopping cart, delivery tracking, product catalog, coupons, claims, inventory management, pre-orders and customer personalization. This was one of the biggest expansions in our history, and we are pleased to be such a valued partner for Trendyol’s growing business. Now let me provide a few thoughts on the near-term demand environment. As we discussed over the last two quarters, the macro uncertainty continues to present headwinds for IT spending and we continue to see longer deal cycles, extra layers of scrutiny in approval and customers electing to buy in smaller increments. These trends persisted through the end of the quarter, but I am very pleased with our execution against these headwinds.

That said, we continue to see a healthy pipeline of deals and interest in our cloud database platform, driven by trends such as the rapid adoption of cloud, desire for greater cost efficiency and IT modernization. And though it is early days, we believe AI will drive a transformational impact for businesses, as customers re-imagine existing applications and create net new ones. AI requirements of extremely high performance and massive scale, coupled with the convergence of operational and analytical capabilities, are the foundational elements of how we are architected. These dynamics are creating additional tailwinds and opportunities for us as a company, while further leveraging the very strengths that make us who we are. You’ve often heard me say that Couchbase has been built for this moment, and I think that’s as true today as it ever has been.

In closing, we’re making progress on our initiatives. We’re committed to focusing on what we can control, and we are nimble in navigating areas we cannot control. We remain dedicated to delivering against our key priorities for fiscal 2024: focus on top-line growth; increase the mix of Capella; drive further sales and marketing efficiency; and accelerate the pace of leverage in our model. Before handing the call over to Greg, I want to emphasize one of our core values that I’ve repeated many times before. At Couchbase, we attack hard problems, driven by customer outcomes. With that, I’ll hand the call over to Greg to walk you through our results in more detail. Greg?

Greg Henry: Thanks, Matt, and thanks everyone for joining us. We had another strong quarter, as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt mentioned, we are pleased with our execution, our dedication to delivering value to our customers, and our ability to navigate the environment, while driving healthy outperformance in our operating loss guidance. I’ll now walk you through our second quarter in more detail, before providing our guidance for the third quarter and full year. Total annual recurring revenue, or ARR, was $180.7 million at the end of the second quarter, representing 24% growth year-over-year, or 23% growth year-over-year on a constant currency basis, and 5% sequentially.

Revenue for the second quarter was $43.1 million, an increase of 8% year-over-year and 5% sequentially. Recall that revenue in the year-ago quarter benefited from strong subscription revenue growth as well as outperformance in our on-demand business and strength in professional services, both of which are non-recurring. Subscription revenue for the second quarter was $41 million, an increase of 11% year-over-year and 6% sequentially. Professional services revenue for the second quarter was $2.2 million, a decline of 20% year-over-year and 11% sequentially, consistent with our expectations following outsized strength in professional services in fiscal 2023. We continue to expect contribution as a percentage of revenue in fiscal 2024 to be below recent levels.

Our ARR per customer performance in the second quarter was $261,000, up from $254,000 in the first quarter, up 14% year-over-year, and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate, or NRR, continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers. Our NRR has been steadily improving, thanks to Capella and our in-quarter NRR was the highest in the last three years. We exited the quarter with 691 customers, an increase of 12 net new customers from the first quarter. As Matt mentioned, Capella, once again, represented the majority of new logos in the quarter, and we grew our Capella customer logo count by more than 20% from the first quarter.

We’re encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos, as evidenced by our consistent ARR growth and our strong retention metrics against a more challenging spending environment. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, results of operation and share count are on a non-GAAP basis. In Q2, our gross margin remained strong at 87.2%. This compares to a gross margin of 88.7% a year ago and 86.4% last quarter. As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but are focused on improving the efficiency of our growth.

We are pleased with our execution on this front as our expense discipline and early benefits from our cost saving initiatives resulted in us outperforming our operating loss outlook. Our sales and marketing expenses for Q2 were $28 million, or 65% of revenue, compared to $24.9 million, or 63% of revenue, a year-ago. Research and development expenses for Q2 were $12.6 million, or 29% of revenue, compared to $12.2 million, or 31% of revenue, a year-ago. We continue to thoughtfully invest in our as-a-service offering as well as in additional features to bolster our platform. General and administrative expenses for Q2 were $6.3 million, or 15% of total revenue, compared to $6.5 million, or 16% of revenue, a year ago. Non-GAAP operating loss for Q2 was $9.2 million or a negative 21% operating margin, 4 percentage points higher than the midpoint of our guidance, compared to an operating loss of $8.4 million or a negative 21% operating margin a year-ago.

Non-GAAP net loss attributable to common stockholders for Q2 was $8 million, or negative $0.17 per share. Turning to the balance sheet and cash flow statement. We ended Q2 with $165.8 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations, or RPO, totaled $170.6 million at the end of Q2, an increase of 2% year-over-year. We expect to recognize approximately 67% or $114.4 million of total RPO as revenue over the next 12 months, which represents 11% year-over-year growth. Operating cash flow for Q2 was negative $500,000, and free cash flow was negative $1.6 million, or negative 4% free cash flow margin. We are pleased with the progress we have made in our free cash flow profile and remain committed to driving further improvement.

Now, I will provide guidance for Q3 and the full year fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong. Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem and go-to-market motion will complement our momentum in fiscal 2024. That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention and expansion rates, deal sizes, sales cycles, logo acquisition and sales productivity. As such, our outlook maintains a consistent degree of conservatism across all of those metrics to account for the uncertainty, as well as the lack of visibility into how the macro may impact consumption trends for emerging as a service offering.

With these factors in mind, for the third quarter of fiscal 2024, we anticipate ARR in the range of $185 million to $188 million, which represents 23% growth year-over-year at the midpoint. We expect total revenue in the range of $42.7 million to $43.3 million, or year-over-year growth of 12% at the midpoint. We expect a non-GAAP operating loss in the range of negative $9.9 million to negative $9.1 million. For the full year of fiscal 2024, we are raising our ARR outlook and now expect ARR in the range of $195.5 million to $199.5 million, or 21% growth at the midpoint. This compares to our prior outlook of $191.5 million to $195.5 million, or 18% growth at the midpoint. We continue to expect total revenue in the range of $171.7 million to $174.7 million, or a year-over-year growth of 12% at the midpoint.

As a reminder, we’ve historically seen variability with respect to the implementation timing of certain enterprise deals, which impacts our revenue visibility, along with new or migrated Capella customers. We, therefore, continue to view ARR as a better indicator than revenue of the strength of our business. While we anticipated that contribution from services revenue in fiscal 2024 would be below recent levels, we now expect this dynamic to be more pronounced this fiscal year due to customers electing fewer services as a result of macro-related budgetary pressures as well as the naturally lower services attach rate with Capella. And finally, we are decreasing our operating loss outlook and now expect a non-GAAP operating loss in the range of negative $42.5 million to negative $38.5 million.

With that, Matt and I are happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Matt Hedberg: Great, guys. Thanks for taking my questions. Congrats on the results here. Matt, I want to start with you. I think the way you outlined kind of the four ways you’re thinking about Gen AI was super helpful. And I think in your script, you mentioned you plan to monetize it with sort of increased Capella adoption and consumption. But I’m wondering, for some of the other products like Capella iQ, is there an additional monetization strategy with that?

Matt Cain: Matt, good to hear from you. Simple answer is that will be part of the Capella offering and we expect to monetize it with additional consumption, more developer reach, better go-to-market efficiency. So, we think there is a compelling impact to the business, but as far as, the service itself is will be part of again part of Capella.

Matt Hedberg: Great. That makes lot of sense. And then, I know on the hyperscaler front, I know you’ve had a lot of progress with AWS. It was great to hear your comments on GCP this quarter. I’m just sort of wondering when you’re seeing deals come in through partners like that, what is the profile of those customers look like? And how would you talk about sort of the pipeline for those hyperscaler-type deals?

Matt Cain: Hey, Matt. So, we’re excited about the ongoing momentum with AWS, obviously, the bar that we got over with GCP and their premier program, the announcement with our AI specific partner program and the benefits that are going bringing there. Investing in the ecosystem and thinking about our customers and developers and the total tools they want to use, partnerships are going to continue to be a big part of our business. Quite frankly, we’re seeing success with partners across all deal types, up to and including our very largest customers that are working on Capella migrations, all the way to our [$5,000] (ph) starter packs and relatively new regions for us. We think a lot about not just partner source, but partner influence.

And you can appreciate that all of the partner that we work with have tremendous reach and credibility with customers. And the extent to which we can build joint solutions, and have strategic account plans, and do territory planning with them, all of which we’re seeing across the business really beneficial to us and a big part of that go-to-market efficiency that we’ve been talking about for some time.

Matt Hedberg: Thanks a lot, Matt. Well done.

Operator: Thank you. Our next question is from Ittai Kidron with Oppenheimer. Please proceed with your question.

Ittai Kidron: Thank you. Greg, I wanted to ask you about revenue, ARR and cRPO. So, looking at your revenue growth, I think it’s the fifth quarter in a row where it’s declining, decelerating from over 30% to now under 10% on a year-over-year basis. Your ARR, however, is holding quite firm at the 23%, 24% range. And you’re cRPO is in the teens, in the low-teens. So, help me reconcile the three, how should I think about the evolution of these three key metrics going forward and why are they so far apart, I guess?

Greg Henry: Yeah. Hey, Ittai. Good to hear from you. Yeah, well, first I’d point out just ARR, obviously, does not include services or any of our on-demand business, whereas revenue and RPO, cRPO would pick all that up. So, there is a little bit of sort of apples and oranges there. And again, just for the revenue perspective, particularly for this quarter, there was a couple of things. Our subscription business continued to do well. Services, as we talked about it in our script, has been more impacted because of the macro, and so the demand is less. So, we’re seeing that. And obviously, last year at this time, just from a year-over-year comparison, we sort of peaked from both subscription revenue and services revenue. And that’s not repeating.

I think the subscription revenue — software revenue has been reasonably constant and we think we will continue to see an improvement on the subscription revenue as we go forward. On RPO and cRPO in particular, when we get towards some of the later stages of our contracts, whether their one-year or multi-year, that’s when they sort of less in the performance — remaining performance obligations. So, we have a couple of our largest customers that are up for renewal between now and Q1, and we think that we will see — start seeing an improvement on the RPO as well.

Ittai Kidron: Okay. And just to be clear, you said Capella is not part of ARR.

Greg Henry: No, Capella is part of ARR. What’s not part of ARR is professional services, any on-demand business.

Ittai Kidron: Got it. And is it common to see Capella on demand, or it’s mostly one-year contracts?

Greg Henry: I’m sorry. Could you repeat that?

Ittai Kidron: Capella is it common to see consumption there on demand or is it mostly one-year contracts or one or three year?

Greg Henry: The largest majority of the Capella business today is our annual credit model, which would fall into ARR.

Ittai Kidron: Got it, okay. Matt, one for you on the competitive side of the equation. Help me understand what you’re seeing out there and what is changing for you. Some of your competitors are doing very well in the marketplace. I’m just trying to think about where do you see your place in the market. And then, on the competitive front, anything from a win rate standpoint, would greatly appreciate it. Thank you.

Matt Cain: Look, Ittai, generally speaking, I’m pleased with how competitive we are. If we think about the nature of applications that we serve, the demand for high-performance and scalability and cloud to edge architectures have never been more prevalent than they are today. I think what’s exciting to us is the additional, what I would call, at-bats that we’re getting with Capella and moving down market and bringing the full power of the Couchbase platform and all those benefits with the consumption model that is often preferred by customers, certainly, a majority of them. But when we get into competitive situations and we do proof of concepts and show the power of the platform and the integration of the services, the value proposition, the TCO dynamics, the do more with less, I would say, in some ways, those value propositions have never been more relevant than they are now.

And I think it increases the value that people see in our platform both existing and new customers. So, I’m pleased with how we compete. We wake up every day with the appetite to do more and do better. But we’re well positioned with dynamics like migration to cloud, modernization and many other things that we’ve talked about before.

Ittai Kidron: All right, good. Thank you. Appreciate it.

Greg Henry: Thanks, Ittai.

Operator: Thank you. Our next question is from Sanjit Singh with Morgan Stanley. Please proceed with your question.